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Thursday, May 3, 2012

Social Security: It’s for young people, too

Elisa Walker, National Academy of Social Insurance

I’m a young American; I value Social Security; and this week in particular, I’m feeling reassured that Social Security is on solid footing and will be there for me when I need it. In fact, I see it as a great investment.

To some, these statements might seem unrealistic, especially given all the negative media coverage that followed the release of the 2012 Social Security Trustees Report last week. But despite the doomsday responses, the reality is actually reassuring – especially for today’s young people, who are used to hearing misleading accounts to the contrary.

Social Security is fully financed until 2033 – in other words, its ongoing income plus accumulated savings can cover all of the benefits due until then. And over the next 75 years (through 2086, the end of the trustees’ estimates), it’s 85% solvent, or able to pay 85% of its obligations without any changes. That’s a pretty solid base to build on.

There’s much to celebrate:

Social Security is one of the most successful government programs in history. Since 1935, it has collected $15.5 trillion and spent $12.8 trillion, leaving a balance of $2.7 trillion in its reserves.

The reserves will continue to grow to about $3.1 trillion by 2020. If Congress acts by then, there may be no need to spend them down.

Social Security has responded to the recession and the slow recovery by performing exactly as it was designed to do. In fact, Social Security is an unsung hero of the recession: by pumping out benefits on time and in full, it has helped keep the national economy – not to mention the personal finances of the 56 million people who receive benefits – in better shape. The Center for Rural Strategies has documented that Social Security benefits provide a crucial chunk of total personal income at the local level, especially in rural counties. This makes a real difference to the small businesses and local economies in America’s towns and cities.

Everyone knows that Social Security is critical to today’s seniors, but in fact it’s critical to all generations. It’s the largest federal benefit program for children, with nearly 7 million children receiving part of their family income from Social Security, mostly after the death or disability of a working parent. And if it weren’t for Social Security, how many more of the elderly would have to move in with their adult children? How many disabled workers or surviving widows would face even greater difficulties feeding their families?

Although it may come as a surprise to many of today’s young workers, Social Security is critical for us too. Besides supporting our parents when they retire, it will provide an essential foundation for our own retirement, as far down the road as that seems. Of course we all hope to do well, but think: today, to buy insurance paying a lifelong annuity (a fixed annual amount) at age 65 that would match the average Social Security retirement benefit ($1,230), plus partially keep up with inflation and continue to pay a widowed spouse, you’d have to pay about $430,000 up front in a lump sum. That’s an inconceivable amount for most people. Plus, other sources of retirement income, like pensions, savings, and housing values, are increasingly uncertain – so there’s a good chance that by the time today’s young adults are ready to retire, reliance on Social Security will be even greater than it is today.

For young workers and their families, Social Security also provides critical life and disability insurance. Consider a sample young family: a 30-year-old worker earning around $30,000 a year, with a spouse and two young children. For that family, Social Security disability and life insurance protection are eachvalued at close to $475,000. And it’s an unfortunate fact that a 20-year-old worker has a 3 in 10 chance of becoming disabled before reaching full retirement age. Again, Social Security is there, especially for those life-changing tragedies we can’t plan for.

That’s the crux of why Social Security is a worthy investment for young people, and indeed for everyone. It’s insurance, on a national scale: you pay in over your working career, in exchange for monthly income if you face work-ending retirement, disability, or death. Plus, it has everything you’d want from an ideal pension plan, including that it pays benefits as long as you live and that benefits keep up with inflation.

So let’s not let today’s young people, or workers of any age, be misled about this vital program. The truth is that we can be confident in Social Security’s future. Social Security is sound, facing only a fixable long-term revenue shortfall, not insolvency. And it will be there in the future for our generation, and for the generations that follow us. In the words of one blogger, “Social Security has had its ups and downs, but it’s in better financial shape now than it was a generation ago, and unless its enemies prevail, it will be there for you when you need it.”

Politicians who want to cut Social Security benefits always stress that current seniors should be held harmless, unaffected by any cuts. (They’re not dumb; they know seniors vote.) Instead, they talk about cutting benefits “out in the future.” While that may sound innocuous, it’s not. Young people, take note: it’s our benefits (not their own) that they propose to cut.

Instead of talking about benefit cuts, how about benefit improvements? Minor changes to Social Security – such as lifting the cap on taxable earnings, or gradually increasing the contribution rate – could more than cover the program’s long-term shortfall, with money left over to improve benefits. Now that’s the kind of future that we as young people should be investing in.

All Comments

Yes, S.S. is for young people also. My brother died in 1969 and left 3 small children. What if my sis-in-law had not had SS for them? Of course, she had to work also, but it sure helped.

But what about my 50 year-old daughter who is unable to work for years due to lupus
and panic disorder? She has applied twice and been turned down twice. My daughter is very smart and experienced having worked for legislators in the WI assembly as well as judges and attorneys. What is she to do?

Of course the $2.7-trillion in reserves are IOU's that Treasury has written to the fund to cover the profligate spending of Congresses over the past 40 years. While these show up as assets on the Social Security balance sheet, they are not accessible until and unless Treasury is allowed to borrow the money elsewhere. So no, Social Security by itself is not a budget problem, but actually redeeming those IOU's in order to pay the benefits is. In fact, in 2011 redeeming those IOU's accounted for $427-billion of new borrowing that Congress had to authorize in the Budget Act last July. That was nearly half of the Act itself. This is the start of the funding problems that are facing Social Security, and it will only accelerate as the 'boomers' retire, stop contributing, and accelerate the withdrawals.

But this doesn't seem to worry anyone, does it? We'll just continue to pretend that Social Security is solvent, which it is as a stand-alone program. However, it is not a stand-alone program. It's funding has been used for masking the true depth of borrowing that the government has been engaged in. It's assets are pledged elsewhere, and redeeming them will require shortfalls somewhere else. It's finances are a shell game. No one seems to want to talk about that; we just stick our fingers in our ears and sing our "La-la-la-la-las" in make-believe land.

Steve: Thanks for reading. It's true that Social Security’s reserves are invested in Treasury securities – as required by law. These Treasury bonds represent a loan from Social Security to the rest of the government, and the money must be paid back when it's needed to pay Social Security benefits. That commitment is just as firm as the nation's obligation to pay back any other holder of US Treasury bonds who wants to redeem their bonds – whether it's China, a Wall Street firm, or an individual citizen bondholder. The current federal budget deficit is the result of an imbalance in general revenues, not in Social Security funds.

Sherry: Thank you for your comment. Glad that Social Security was there for your brother's family. Surprisingly, many people forget that Social Security is more than just a retirement program.

Sorry to hear that your daughter is struggling. NASI is a research-based think tank and, as such, we don't handle benefits directly. You might want to look into an organization called The National Organization of Social Security Claimants' Representatives. Their website is: http://www.nosscr.org/. Wish we could help more.

First of all there is no way that the program can be fully funded as you say. This is just one of the myths that exist because it is not a true trust fund. Any time the government has control over anything it will be taken for other uses. Entitlement spending is far too large and too complicated for social security to work in the future. All of the benefits you describe that social security provides to young people was not the original intent of the program. If we want to call it welfare then we should call it welfare and it should be a welfare tax. To think that money that doesn't exist will be there in the future with greatly reduced benefits is just ludicris. I will never see the full benefit of the money that I and my employers have contributed over the past 14 years. I am much better off having that money in my 401K and controlling it myself so it can be passed down to my children if I so choose to do so.